Near-term demand and brand investment weigh on Li Ning's profit, but Goldman Sachs remains optimistic about brand and earnings recovery after 2027

Overview

This report reviews Li Ning's earnings call and assesses the impact of weak consumption, deeper discounts, and continued brand investment on FY26 performance. Goldman Sachs has become more cautious about near-term sales and margins but believes the company's commitment to operating quality, brand building, product innovation, and channel discipline could lay the foundation for a recovery in market share and profitability in FY27 and beyond, and therefore maintains its Buy rating.

Core views

The key change following the earnings call was a significant reduction in FY26 operating expectations. Although 1H26 results were better than feared, management had not observed a meaningful recovery in consumption in 3Q26 as of the report date: offline traffic continued to decline, overall retail sell-through remained down YoY despite a low base, and discounts widened both YoY and sequentially. July was particularly weak due to disruptions from multiple typhoons, and trends had still not improved materially in August. Management therefore lowered its FY26 revenue growth target from high single-digit YoY growth to low single-digit growth. FY26 net margin guidance was reduced from high single digits to mid-to-high single digits, below FY25's 9.9%, reflecting weaker revenue assumptions, lower operating leverage, and continued brand-building investment. The share price fell approximately 2% after the earnings call, which the report believes mainly reflected the market's margin expectations, particularly for 2H26, remaining below expectations. Accordingly, Goldman Sachs lowered its 2026—2028 sales forecasts for Li Ning by 2%—4% and net profit forecasts by 13%—15%. Revenue forecasts were reduced from RMB30,863.8 million, RMB33,000.4 million, and RMB35,193.3 million to RMB29,988.6 million, RMB31,816.5 million, and RMB33,864.0 million, respectively. EPS forecasts were lowered from RMB1.04, RMB1.26, and RMB1.54 to RMB0.88, RMB1.09, and RMB1.32, respectively. The new forecasts imply revenue growth of 1.3%, 6.1%, and 6.4% in 2026—2028 and EPS growth of -22.1%, 23.7%, and 21.0%. Net profit is forecast at RMB2,285.7 million, RMB2,827.0 million, and RMB3,420.7 million, with net margins of 7.6%, 8.9%, and 10.1%, respectively. This trajectory reflects Goldman Sachs' view that 2026 will be a period in which demand, discounting, and investment jointly depress profit, with revenue recovery and improved operating efficiency only beginning to emerge gradually from 2027. Regarding gross margin, offline and online discounts deepened by 3.5 percentage points and low-single-digit percentage points YoY, respectively, in 1H26, but supply-chain cost optimization offset some of the pressure. Management expects FY26 gross margin to remain flat with or improve slightly from FY25's 49.0%. Whether gross margin can recover in FY27 will depend on discount normalization and product-mix improvement. Raw-material inflation could be a headwind, with footwear expected to be affected more than apparel. The company is mitigating the impact by locking in supplier prices, optimizing the value chain, and adjusting its material mix. Meanwhile, marketing and promotional expenses will increase further: driven by the Asian Games, marathon sponsorships, Curry-related initiatives, and new athlete partnerships, the marketing and promotion expense ratio is expected to reach the mid-teens in 2H26 and the low-to-mid-teens for FY26 as a whole. Even with fewer major sporting events in FY27, continued investment in athlete resources and professional sports positioning could keep expense intensity elevated. The tax rate normalized in 1H26, and management expects it to remain at a normal level in FY26. Inventory, discounting, and product refreshes collectively explain the current sales pressure. Channel inventory for certain products is elevated, increasing promotional pressure amid weak demand and intensifying competition. The running business was also affected by issues with core product upgrades: consumers perceived the upgrade from Feidian 5C to 6C as insufficiently compelling, while inventory of older models disrupted market pricing. Running retail sell-through declined approximately 3% YoY in 1H26, although professional running-shoe sales exceeded 14.80 million pairs, versus 26.00 million pairs for FY25 as a whole. Management plans to further tighten inventory management, improve operations, and strengthen channel discipline to gradually restore pricing and brand value and return to growth in 2027. Long-term opportunities primarily arise from greater penetration of cushioned running shoes, women, teenagers, and core runners, and management continues to believe that Li Ning remains among the leaders in the running industry. Performance varied across categories. Basketball retail sell-through declined 13% YoY in 1H26, but management views the industry downturn as an opportunity to strengthen long-term professional brand equity and plans to continue investing in Curry, Wade, and broader basketball intellectual property. The decline in badminton sales mainly reflected a cyclical adjustment after two consecutive years of exceptionally strong growth. Training and sports casual retail sell-through grew 5% YoY and remained flat, respectively, supported by demand for functional apparel, women's products, and lifestyle sportswear. Given their large addressable markets and broad use cases, management continues to regard these two categories as major long-term growth opportunities. The channel strategy continues to emphasize quality over scale. Loong Store will be used to test premium lifestyle positioning and Gold Label products, targeting different customer groups and seeking higher average selling prices. The company plans to expand cautiously, validating profitability and the operating model before pursuing aggressive store openings. The broader strategy is to shift from price-driven to brand-driven growth, reducing low-quality expansion and excessive discount competition. Management views the Curry partnership as a platform for enhancing overall brand equity rather than merely a short-term revenue-generating initiative for the basketball category. Goldman Sachs agrees with this direction, believing that the brand, product innovation, and channel discipline will depress profit in the near term but could deliver healthier discounts, operating quality, market share, and sustainable earnings growth over the long term. On valuation, Goldman Sachs lowered its 12-month target price from HK$22.80 to HK$19.50, applying an 18x 2026—2027E P/E multiple benchmarked against the average 2026—2027E trading P/E of global sportswear companies. The previous methodology applied a 20x 2026E P/E multiple. Li Ning's current price implies approximately 12x 2026E P/E, which Goldman Sachs considers undemanding, and it maintains its Buy rating despite the recent earnings downgrades. The target price implies 34.9% upside from the current price of HK$14.46.

Analysis framework

Goldman Sachs first used information from the earnings call and retail trends in 3Q26 as of the report date to test its previous revenue assumptions, then mapped traffic, discounts, channel inventory, product refreshes, supply-chain savings, and brand spending item by item to gross margin, operating leverage, and net margin. It then assessed near-term pressures and long-term growth potential by category and channel, updated its 2026—2028 revenue, profit, and EPS forecasts, and finally determined the target price by reference to the forward P/E multiples of global sportswear companies.

Methodology notes

• Valuation methodologyP/E and PEG valuation

  Forward P/E valuation based on comparable companies

  The report benchmarks Li Ning against the average 2026—2027 trading P/E of global sportswear companies and applies an 18x 2026—2027E P/E multiple to derive a 12-month target price of HK$19.50.

• Industry/Sector analysis frameworkVolume-price decomposition

  Decomposition of retail sell-through, discounts, and margins

  The report combines changes in retail sell-through by category, online and offline discounts, product mix, supply-chain costs, and marketing expenses to explain changes in sales growth, gross margin, and net margin.

• Industry/Sector analysis frameworkSupply-demand framework

  Integrated analysis of demand, competition, inventory, and discounts

  The report believes that weak demand, intensifying competition, and elevated channel inventory for certain products have jointly increased discount pressure. Tighter inventory, product upgrades, and a recovery in demand are necessary conditions for improvement in 2027.

• (Method outside the vocabulary)

  Earnings forecast revisions based on management guidance

  Based on the lowered revenue and net margin guidance, 3Q26 retail performance, and continued brand investment, Goldman Sachs revised its 2026—2028 revenue, net profit, and EPS forecasts and adjusted its target price accordingly.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Li Ning Company Limited (2331.HK)

  Weak consumption, discounting, and brand investment are weighing on near-term profit, but improvements in the brand, products, and channels are expected to support growth and earnings recovery after 2027.

  Strengths

  The company remains among the industry leaders in running, while its training and sports casual categories have large addressable markets. It has brand resources including Curry, Wade, sporting events, and professional sports positioning, as well as supply-chain cost optimization capabilities.

  Weaknesses

  Recent offline traffic and retail sell-through have been weak, channel inventory for certain products is elevated, running product upgrades have lacked appeal, core categories such as basketball are under pressure, and elevated marketing investment is weakening operating leverage.

  Comparison

  The target price applies the average 18x 2026—2027E P/E of global sportswear companies; Li Ning's current price implies approximately 12x 2026E P/E.

  Risks

  Same-store sales growth below expectations, intensifying competition, and higher-than-expected brand, store, and labor-related operating expenses.

Key data

• FY26 revenue growth guidanceLow-single-digit YoY growthLowered from previous high-single-digit YoY growth
• FY26 net margin guidanceMid-to-high single digitsLowered from previous high single digits; FY25 was 9.9%
• FY26 gross margin expectationFlat with or slightly above FY25's 49.0%Supply-chain cost optimization is expected to offset some of the pressure from wider discounts
• Earnings forecast revisions2026—2028 sales cut by 2%—4% and net profit cut by 13%—15%Primarily reflecting near-term pressure from demand, discounts, and brand investment
• 2026—2028 revenue forecastsRMB29,988.6 million, RMB31,816.5 million, RMB33,864.0 millionCorresponding to growth of 1.3%, 6.1%, and 6.4%
• 2026—2028 EPS forecastsRMB0.88, RMB1.09, RMB1.32Previously RMB1.04, RMB1.26, and RMB1.54, respectively
• 2026—2028 net margin forecasts7.6%, 8.9%, 10.1%Expected to bottom in 2026 and gradually recover thereafter
• 2H26 marketing and promotion expense ratioMid-teensExpected to be in the low-to-mid-teens for FY26 as a whole
• 1H26 running retail sell-throughDown approximately 3% YoYProfessional running-shoe sales exceeded 14.80 million pairs, versus 26.00 million pairs for FY25 as a whole
• 1H26 basketball retail sell-throughDown 13% YoYDemand was weak, but management plans to continue increasing long-term brand investment
• 1H26 training and sports casual retail sell-throughUp 5% YoY and flat, respectivelySupported by functional apparel, women's products, and lifestyle sports demand
• Target price and valuationHK$19.50; 18x 2026—2027E P/EPrevious target price HK$22.80; current price implies approximately 12x 2026E P/E

Impact & implications

The report believes Li Ning's primary challenge in 2026 is that weak demand, wider discounts, and increased brand investment are simultaneously pressuring revenue and profit, but the company has not shifted toward pursuing low-quality scale growth. If inventory management, channel discipline, product innovation, and brand building gradually improve pricing and consumer perceptions, market share, operating efficiency, and margins could recover in FY27 and beyond. Until then, expense intensity and retail demand will continue to constrain earnings performance.

Risks

• Same-store sales growth could be slower than expected.
• Competition in the sporting goods market could intensify further.
• Brand investment, store expenses, and labor costs could be higher than expected.
• Raw-material inflation could weigh on gross margin, with footwear potentially affected more than apparel.

What to watch

• Monitor whether consumer demand, offline traffic, and retail sell-through show a meaningful recovery in 3Q26 and thereafter.
• Monitor whether tighter channel inventory, clearance of older products, and online and offline discounts can gradually normalize.
• Monitor whether FY26 gross margin can remain at FY25's 49.0% or improve slightly, as well as progress in product-mix improvement in FY27.
• Monitor the marketing and promotion expense ratio in 2H26 and FY27 and the actual impact of brand investment on net margin.
• Monitor penetration progress in running product upgrades, cushioned running shoes, women, teenagers, training, and sports casual categories.
• Monitor whether Loong Store and Gold Label can validate profitability, the operating model, and higher average selling prices before expansion.